Investors not likely to pay attention to FOMC and BoE announcements

The 2020 US Presidential Election hangs in the balance with an outcome that is too close to call. No winner has been declared at the time of publication and it could be days before the new President is announced. Trump’s campaign has already requested a re-count of ballots in Wisconsin and the same could be asked for other states.

An uncertain election outcome with a split government was worse case scenario for Wednesday but instead of crashing lower, stocks rallied hard with the Dow Jones Industrial Average up more than 700 points at one stage.  While this rally may seem counterintuitive, the two most likely outcomes are positive for the markets.

With a split government, even if Biden wins, sweeping policy changes like tax increases or more regulation are unlikely.  If Trump wins, investors can expect more business friendly policies.  The markets also liked the decision by Illinois voters to reject the fair tax amendment that would have introduced gradually higher taxes for those making over US$250,000 instead of their flat 4.95% tax regardless of income level. In California, voters rejected the push to provide benefits to drivers for food delivery and ride hail companies like Uber, Lyft and DoorDash. All of these decisions are good for corporate America and equities.  

Yet currencies did not follow equities higher. Most of the major currency pairs including EUR/USD, USD/JPY, USD/CHF and USD/CAD were unchanged on Wednesday. GBP/USD fell ahead of Thursday’s Bank of England Quarterly Inflation report and monetary policy announcement but AUD/USD and NZD/USD extended recent gains. 

The greenback is mixed as investors wait for the final tallies which may not be delivered until Friday. Counting in Pennsylvania is expected to go on until Friday and the secretary of the state of Michigan also said it could take until the end of the week for a winner to be declared.

Complicating matters further, Trump filed a lawsuit to halt ballot counting in Michigan. Typically currencies take their cue from Treasuries but USD failed to follow ten year Treasury yields, which are down more than 10%. 

The US Fed and the Bank of England have monetary policy announcements tomorrow and the question is will they even matter? The latest US economic reports haven’t been terrible. Manufacturing activity is up; service sector activity is flat but not contracting. Equities are holding steady and the latest decline in yields makes lending conditions easier. All of this gives the central bank little reason to act, especially with investors focused more on the election than stimulus. They’ve made it clear that interest rates will remain on hold for the next few years and that’s the message they’ll reinforce at Thursday’s meeting. 

The Bank of England on the other hand is widely expected to ease monetary policy. PMIs were revised lower today, underscoring the overall weakness of the economy. Very little progress has been made on Brexit talks and as the clock ticks towards next week’s soft deadline, the probability of a no deal Brexit is high.

The central bank also meets on the same day the country enters its four week long lockdown. The closure of pubs, restaurants, gyms and non-essential shops will have a severe impact on an economy that was already sputtering.  The central bank will not only lower its economic projections but will be taking steps tomorrow to avoid a double dip recession. More asset purchases are likely but the market wants to know if negative interest rates are next. 

World Health Organization selects Iran regional base for cooperation in the nutrition science and food industry

According to reports, World Health Organization (WHO) has selected National Institute of Nutrition and Food Industry Research of Iran as the regional base for cooperation in the nutrition science and food industry for Eastern Mediterranean countries.

The importance of food and nutrition in the world these days is felt more than ever. Even in some developed countries the issue of establishing the Ministry of Food and Nutrition has been raised, Jalaledddin Mirzaei Razzaz, head of the Nutrition and Food Technology Research Institute said.

In Iran, the ministries of health and agriculture were commissioned to make arrangements for food independence.

Iran was in close competition with countries such as Saudi Arabia and the United Arab Emirates, and finally, Iran was selected with the efforts made by the Ministry of Health, he explained.

He expressed hope that such international cooperation will improve food and nutrition in addition to people's health.

A report jointly prepared by FAO, IFAD, UNICEF, WFP and WHO shows that currently around 690 million people or 9% of the world population are hungry. Compared to the previous figures, this number is up by 10 million people in one year and by nearly 60 million in five years.

“The State of Food Security and Nutrition in the World 2020” also indicates that the number of people affected by severe food insecurity has experienced a similar upward trend over the last five years. In 2019, close to 750 million—or nearly one in ten people in the world—were exposed to severe levels of food insecurity. The figures reveal that about 2 billion people in the world did not have regular access to safe, nutritious, and sufficient food in 2019.

Considering the widespread impacts of the COVID-19 pandemic, it is estimated that the pandemic may add between 83 and 132 million people to the total number of undernourished in the world in 2020 depending on the economic growth scenario.

Also, the nutritional status of the most vulnerable population groups is likely to deteriorate further due to the health and socio-economic impacts of COVID-19.

While the burden of malnutrition in all its forms remains a challenge for the world, current estimates reveal that in 2019, 21.3% (144 million) of children under 5 years of age were stunted, 6.9% (47 million) wasted, and 5.6% (38.3 million) overweight.

The report states that healthy diets are unaffordable to many people, especially the poor, in every region of the world. The most conservative estimate shows they are unaffordable for more than 3 billion people in the world. Healthy diets are estimated to be, on average, five times more expensive than diets that meet only dietary energy needs through a starchy staple.

Under current food consumption patterns, diet-related health costs linked to mortality and non-communicable diseases are projected to exceed $1.3 trillion per year by 2030.

On the other hand, the diet-related social cost of greenhouse gas emissions associated with current dietary patterns is estimated to be more than $1.7 trillion per year by 2030.

According to the report, Iran experienced a relative reduction in the prevalence of undernourishment in its total population, dropping from 5.2% in the period of 2004-2006 to 4.7% in the period of 2017-2019. However, despite this improvement, the net number of people experiencing undernourishment increased to 3.9 million, from 3.6 million.

Israel the biggest resistance in easing US Iran conflict

In 2018, soon after becoming President of the United States Donald Trump withdrew from the 2015 Iran nuclear deal, calling it “the worse deal ever.” In response, Iran’s supreme leader, Ayatollah Khamenei, vowed never to renegotiate another nuclear deal with the United States. Iran must accept that if Trump is reelected, it will have no choice but to reengage in negotiations with the United States.

Based on his recent statements, including uttering during the peace ceremony between Israel, Bahrain and the United Arab Emirates, Trump appears eager to get back to the negotiating table. He may even try to get Senate approval (67 votes) to convert his deal into a treaty.

Former vice president Joseph Biden, if elected, is also expected to quickly negotiate a new deal with Iran, with the help of other participants of the deal. Some of his advisers have circulated working papers with the aim of getting “back to the JCPOA,” the 2015 Joint Comprehensive Plan of Action.

Many in Israel believe that Biden would offer up-front sanctions relief to bring Iran back to the table, without getting much in return. They insist, it was a bad idea in 2013, 2015 and would be problematic 2021. They openly say that since the United States withdrew from the JCPOA in 2018, the Iranian regime has engaged in nuclear blackmail, enriching more uranium, installing new centrifuges, enhancing its R&D efforts, and taking many other dangerous steps.

International Atomic Energy Agency (IAEA) has issued several reports expressing its concern, backed by Israeli findings that the Mossad captured during its daring raid on Iran’s then-secret atomic archive. They say, the international community has failed in taking any decision or decisive action. Europeans have contributed to this inaction. Iranians, meanwhile, have played their cards well, deferring any major decision until after the elections in United States.

In Israel there is a perception that no matter who negotiates, the dangers are clear. They allege, Iranians have a demonstrated history of fleecing American counterparts at the negotiating table. The American negotiators failed to seize the advantage, despite the fact that Iranian President Hassan Rouhani telegraphed his negotiation strategy in his 2010 book. They also say that the errors of the 2013–2015 negotiations, which yielded Iran massive sanctions relief and sunsetting restrictions, made that abundantly clear.

Israel insists that the new agreement must address all core weaknesses of the JCPOA. Indeed, it cannot be more of the same with some minor improvements. The goal must be to establish clear new terms so that the JCPOA’s vagueness does not persist. The deal should include an end to Iran’s support for terrorism, regional destabilization and other malign activities. This was all articulated by US Secretary of State Mike Pompeo in his “12 points” plan. It demands the new agreement should also include all three elements of Iran’s illicit nuclear program: fissile materials, weaponization, and means of delivery.

Israel insists that a new deal should be achieved only after the regime comes clean about its past, admits to previous violations and declares its past inventory. Even then, it will not be enough. The JCPOA included dangerous sunset clauses that expired over the course of a decade. Those must be removed for decades, with stricter monitoring and verification.

Some say the right agreement would never be accepted by Tehran. Acquiescence to such an agreement would tantamount to regime change given that it would run counter to the “revolutionary” aims of the Islamic Republic. But that does not mean that America’s president, Democrat or Republican, should accept anything less.

In a nutshell Israel demands, regardless of who wins this November, there should be a “sanctions wall” in place, and it should not be easy to take down. These sanctions should punish the wide range of Iranian terrorist activities, human rights violations and aggressive behavior.

No matter who wins, there is a risk that the next administration will be too occupies with concerns about China, followed by Russia and North Korea, relegating Iran to a lesser priority. This might soften the ground for a less stringent nuclear deal. More must be done to avoid this.

Israel believes, Trump if wins has an opportunity between now and January 2021 to sanction Iran’s entire energy sector as part of its “maximum pressure” scheme. It can also blacklist all of Iran’s nuclear agency workers.

The Biden team has indicated that it may lift sanctions on Iran. Some of his advisers believe that sanctions relief will help achieve an agreement that can help in avoiding war. It is being opposed on the pretext that sanctions can help reach the right agreement and prevent war. Propagators of this philosophy insist that the threat of war can be helpful. Indeed, without a credible military threat, the Iranians won’t come to the table willing to negotiate real changes to the JCPOA.

One significant change since the last round of talks is the peace agreements between Israel and three Arab countries (the United Arab Emirates, Bahrain and now Sudan). These countries and others strongly object to granting any concessions to Iran, in the nuclear file or with any of its other malign activities. The concerns of America’s regional partners were ignored last time but should not be ignored again. Their decisions to make peace with Israel were driven, in part, by their shared concerns about Iran and a future flawed deal.

Some former Israeli officials have recently suggested offering other red lines in a future Iran deal. However, others insist red lines do not yield desired results. They demand Israeli government should reject any compromises that give Iran the benefit of the doubt. The priority should be to convince the international community that business with Iran is off limits as long as its policies do not change.

US Elections: Likely Impact on Pakistan

The much anticipated elections in United States will come to a close on 3rd November 2020. The Republican President, Donald Trump, is being challenged by Democratic Party nominee Joe Biden, who is best known as Barack Obama's Vice-President but has been in US politics since 1970s.

Biden is leading National Presidential Polls by 52% to 43%. National polls are a good guide as to how popular a candidate is across the country, but these are not necessarily a good way to predict the outcome of the election.

In 2016, for example, Hillary Clinton led in the polls and won nearly three million more votes than Donald Trump, but she still lost – that is because the US uses an Electoral College system, so winning the most votes does not always win the election.

According to a report by Topline Securities, the outcome of US Elections 2020 is unlikely to have major repercussions on Pakistan unlike the past. Key areas that Pakistan will keep a close eye on, if Biden wins, will be his 1) trade policy with China, 2) ties with India, (3) policy on troops pull-out from Afghanistan and 4) financial assistance to Pakistan (including IMF).

Biden is likely to ease stance on China adopted by President Trump, who has termed China as the biggest threat to the US right now. This in turn is likely to be a positive for Pakistan, given long standing relationship between Pakistan and China and also the China Pakistan Economic Corridor (CPEC).

President Trump and Prime Minister Imran Khan have enjoyed a strong relationship, where President Trump in January 2020 hailed the growing relationship between the US and Pakistan. However, Trump’s close relationship with India has somewhat left a sour taste with Pakistan, where PM Imran Khan had recently said in an interview that Pakistan wants ‘even-handed treatment’ from the US with respect to India.

The brokerage house expects Biden to continue with Trump’s policy of US troops pull-out from Afghanistan, however in a more gradual and measured way.

Historically, Pakistan and Democrats have held a relatively more fruitful relationship, where it was under the Democrats that the Kerry-Lugar-Berman Act was approved – the largest civilian assistance package to Pakistan. However, it is under President Trump that Pakistan signed the latest IMF program. The US is the largest cumulative contributor to the IMF and the largest voting bloc – holding effective veto power for many decisions. 

Topline believes Financial Markets are likely to see a relief rally on the conclusion of the US elections given that uncertainty is likely to end.

Both the parties have failed reaching an agreement over a fiscal stimulus package, which it believes will be passed after the elections irrespective of the outcome of the elections.

The markets will be keen to see the structure of the government (President and the Senate).

At present, the US has a Republican President and a Republican Senate (though the House is Democrat).

A unified government is likely to be appreciated by the financial markets as a divided government is likely to result in policy standoff between the President and the Congress.

The US market’s reaction to a Republican win has been much better compared to a Democrat win. The PSX has largely mirrored US equities performance post the outcome of the US Elections